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Cigarette Taxes Force Duel Between State Budgets and Better Health

08/12/02

www.CNSNews.com - (CNSNews.com) - Against a backdrop of rising budget deficits, state legislators in 17 states have raised cigarette taxes this year, and in the process, provided victory for anti-tobacco groups who want the extra revenue to pay for progra

As a result of the tax hikes, some smokers are buying cigarettes over the Internet or, illegally, from smugglers who buy their cigarettes in low-tax states and sell them in high-tax states. Those who quit smoking may satisfy the anti-tobacco activists in one way, but by doing so, also limit the revenue raised from cigarette sales.
Over the long run, economists say, such revenue losses could leave government programs under-funded and overstressed. An increase in the number of longer-living non-smokers could even increase the burden on Social Security some day, the economists say.
"There's a real danger, if [government] programs get put into place that are funded by a projected revenue stream, that is eventually going to disappear," warned Michael J. Moore of the University of Virginia's Darden School of Business Administration. "What do you do when the money runs out?"
As Hoover Institution research fellow Bill Whalen put it in a July 3 San Diego Union-Tribune op-ed, "The dirty little secret is that Sacramento [Calif.] needs you to keep smoking if lawmakers are to fix gaping holes in the budget and continue to lavishly fund spending programs. It's true elsewhere as well."
While smokers may not be willing to quit immediately in response to higher prices, they may quit several months or years into the future. And prospective smokers may never start, Moore said, meaning less money for state budgets.
"So a tax increase might have a small effect on quantity smoked in the short run, and that will cause revenues to go up," Moore explained; "but as the quantity smoked declines more and more over time, for the given tax increase, the revenue stream will get smaller."
It's an economic argument disputed by the pro-tax Campaign for Tobacco Free Kids.
"We haven't hit a [tax] level or seen a level where it's too much," said spokesman Michael Berman.
"Every state that has ever raised the tobacco tax has seen both a reduction in smoking and an increase in revenue generated," said Berman. New York City recently heaped a city tax of $1.42 on top of the existing state tax for a combined total of $3 per pack. "They've seen in the first month a huge drop off in sales of cigarettes and an increase in revenues," said Berman.
"I guess if you raised the tax $50 you could see a huge increase in black market and all sorts of other problems, but nobody out there has really proposed that," said Berman.
As of January 1, 2002, the median state cigarette tax rate was 34 cents per pack and the average was 45 cents, according to Bruce Bartlett, a scholar with the National Center for Policy Analysis. But by July, the median had risen to 41 cents and the average to 54 cents.
Ten years ago, both the median and the average were only 25 cents per pack, Bartlett said.
Bartlett contends that higher cigarette taxes are encouraging smuggling and that while the average cigarette-tax rate increased by 64 percent between 1992 and 200, gross state tobacco-tax revenues increased by only 35 percent.
Over the past decade, economists have tried to figure out the most effective rate of cigarette taxes. Ideally, say economists, cigarette taxes should be at a level that balances the costs to society as a whole. They should be low enough to avoid revenue loss but high enough to pay for the Medicare and Medicaid health costs associated with tobacco.
According to Moore, some economic studies prior to this year's spate of tax increases had concluded that tax levels were already at appropriate levels.
As for the problem facing the financially precarious pay-as-you-go Social Security system, Moore acknowledges that it would be "politically very charged to say ... you don't want people to quit smoking because it will bankrupt Social Security."
But seeing it through the eyes of an economist trying to sort out the costs and benefits of cigarette taxes, "the fact of the matter is smokers don't live as long as non-smokers, and since social insurance premiums are not actuarially rated according to smoking status, like private life insurance, then smokers are subsidizing the Social Security of non-smokers," Moore said.